THE possibility that a future sovereign financial crisis may threaten the stability of the international financial system cannot be ruled out, and current mechanisms to anticipate, avoid and resolve crises have limitations, according to the US General Accounting Office (GAO).

The independent investigative agency of the US Congress arrived at this conclusion in its latest report submitted to the US House Committee on Banking and Financial Services following the outbreak of the financial crises in Southeast Asia. The full report was re-published in the US Information Service Wireless File on July 15.

GAO said although some factors may have lessened the likelihood of such a systemic crisis, such as a recent decrease in potentially volatile portfolio investments in emerging market countries, other factors may have raised the likelihood of such a crisis, including continuing large funds flows into these countries, which may amplify the magnitude of individual crises.

One limitation of mechanisms used to anticipate sovereign financial crises is that countries do not always supply the necessary information for market participants to assess accurately investment risks, the GOA said. Resolving crises can be impeded by, for instance, investors' actions that may deepen the crisis if they quickly remove their funds from a country in crisis, and by IMF and creditor countries' governments having difficulty deciding whether to intervene to help resolve the crisis, it added.

GAO said although the effects of a sovereign financial crisis may be limited to the debtor country and its creditors, some of these crises, such as Mexico's 1994-95 crisis, have affected other countries financial and economic situations. This has occurred through a ''contagion effect", when in response to a crisis in one country, investors removed their funds from other countries.

GAO identified some past crises, which have posed a systemic risk to the international financial system. It said: ''Systemic risk is the risk that a financial disturbance, which triggers substantial unanticipated changes in the prices of financial assets, may seriously harm the financial position of large financial firms, which in turn, could threaten to disrupt the global payments system and the capacity of the international financial system to efficiently allocate capital."

The GAO raised the concern that intervention may create or increase ''moral hazard". It said, ''Moral hazard occurs when investors or debtor countries alter their financial decisions on the basis of a belief that the official sector will supply financial assistance to them in a crisis."

The recent financial turbulence in Southeast Asia, which began in Thailand before spreading to neighbouring countries, has raised the profile of greater risks in the global financial markets, which attract growing concern of government leaders and international organisations.

Addressing the Institute for International Economics recently, Summers said: ''The main concern ... is systemic risks ­ the possibility that the failure of a major financial firm, or a disruption in one financial market or country, could have contagion effects on other firms and markets, with serious adverse economic consequences.

''This is important because the consequences of financial crises are not just economic, but can affect political stability and the conditions necessary for maintaining a democratic society."

Summers said over US$250 billion (Bt7.5 trillion) in private capital flowed to emerging markets in 1996, compared to $25 billion in 1986. In just the last two years, he said, 31 countries have tapped global financial markets for the first time.

''This new financial environment is not without its risks," he said. ''It's a bit like the impact of an interstate highway system ­ people get places faster and new opportunities are created, but accidents can be much worse."

Stanley Fischer, deputy managing director of the International Monetary Fund, yesterday urged Thailand to take the necessary steps to avert the pressure on its financial markets by introducing a clear, complete package of measures to stem the financial crisis and undertake spending reforms.

He played down the crisis in Asia as ''more contagion than we expected but nothing like (the Mexican peso crisis in) 1995."

The GAO recommended that the G-7 countries should anticipate and avoid future sovereign financial crises and resolve these crises when they threaten the international financial system.

The GAO further suggested that the IMF establish voluntary standards that countries may use when disclosing economic and financial data to the public; and expansion of the general arrangements to borrow, which are lines of credit that IMF maintains with the Group of Ten Countries (G-10); and an expedited IMF decision-making procedure to extend financing in exceptional circumstances to member countries.